PANW Stock: Will Platformisation Pay Off for Palo Alto?

The Palo Alto Networks share price has underwhelmed in 2024 amid investor concern about near-term growth. PANW stock could get a boost if the company can succeed in bringing more customers onto its consolidated platform.

Palo Alto Networks [PANW] is a cybersecurity company headquartered in the Silicon Valley town of Santa Clara.

Palo Alto competes with CrowdStrike [CRWD], SentinelOne [S] and Microsoft [MSFT], among others, in the endpoint tools market. These tools detect malware on end users’ devices, such as smartphones and laptops.

This spotlight on PANW stock will highlight the company's role in helping businesses adopt AI securely and discuss its ambitious platformisation strategy, which was announced earlier this year.

Palo Alto Networks Joins Forces with IBM

In May, Palo Alto Networks signed a broad agreement to acquire cloud security assets from IBM [IBM], including its QRadar software. Palo Alto Networks will incorporate IBM’s watsonx large language models into its Cortex XSIAM platform.

The consolidation makes sense: there has been a resurgence in dealmaking in cybersecurity in recent months, as companies look to combine skills, expertise and products to gain an advantage in a market that has become even more competitive since the emergence of generative artificial intelligence (AI).

“The security industry is at an inflection point where AI will transform businesses and deliver outcomes not seen before. It’s a moment to accelerate growth and innovation,” Palo Alto CEO Nikesh Arora said in a press release.

The company also announced an expansion of its strategic alliance with Accenture [ACN], which will help businesses securely embrace and implement generative AI.

PANW Stock Struggles

The Palo Alto Networks share price has risen 4.5% year-to-date as of 6 August, after hitting an all-time high on 9 February, and is up 40.3% in the 12 months to 6 August.

In comparison, the CrowdStrike share price is down 6.2% year-to-date but up 53.5% in the past year. The SentinelOne share price is down 20% but up 32.8% in the respective periods.

According to Stockcircle, no institutional investors that filed their 13Fs for Q2 bought or sold PANW shares in the three months to the end of June. Five bought $77.9m worth in Q1, while five sold $286.8m worth.

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PANW and S Lower Guidance, CRWD Raises

PANW stock has been on a downward trend over the past few months after offering disappointing billings guidance. Total billings for its fiscal 2024 are expected to be between $10.13bn–10.18bn, down from a prior forecast of $10.10bn–10.20bn.

While the cybersecurity sector has remained “very robust”, the company has hit “short-term bumps” as a result of its platformisation strategy, Arora told Bloomberg TV following its quarterly results in May.

CFO Dipak Golechha said on the Q3 earnings call that there had been “significant volatility in our billings” due to payment terms. Despite concerns, the customer response to the platformisation strategy “has been nothing but encouraging”, Arora stressed, pointing out that billings are “an artificial metric”.

SentinelOne lowered its full-year revenue guidance for its fiscal 2025 from $812m–818m to $808m–815m when it reported Q1 results on 30 May. CrowdStrike reported its Q1 2025 results five days later and raised its full-year revenue outlook from $3.92bn–3.99bn to $3.98bn–4.01bn.

Source: Yahoo Finance 

PANW stock could be considered overvalued when compared to CRWD and S. However, if the company can demonstrate that it is succeeding in bringing more customers onto its platform, then the investment case for PANW stock may strengthen.

PANW Stock: The Investment Case

The Bull Case for Palo Alto Networks

Golechha pointed out on the Q1 earnings call that subscription sales of its higher-quality products, including AI solutions, are an important way to measure the business's success.

Palo Alto Networks is investing heavily in technology to meet demand in a rapidly evolving cybersecurity landscape. Threat activity is on the rise, and businesses need smarter solutions to keep pace.

According to NAND Research’s Principal Analyst and Founder, Steve McDowell, Palo Alto Networks’ focus on platformisation and AI “should keep it at the forefront of the cybersecurity industry, providing substantial growth and value creation potential.” However, he added, it does face “strong and aggressive” competition, including from CrowdStrike and SentinelOne.

The Bear Case for Palo Alto Networks

Palo Alto Networks’ decision to double down on its platformisation strategy could potentially be the company’s undoing in the long run.

Revenue growth is expected to be lower for 12–18 months as a result of the strategy, the company warned on its Q2 earnings call in February. Customers of legacy products are being migrated to the consolidated platform and can access all services at no extra cost. The hope is that once their contracts with other cybersecurity vendors expire, they will migrate to Palo Alto Networks’ services, which would increase the value of their contract.

While a consolidated platform is designed to simplify cybersecurity management by having everything in one place, there is a risk that some customers may decide, for whatever reason, that moving to the platform is not worth it. The onus will be on Palo Alto Networks to keep improving its service offerings and convince customers that its platform should be the product of choice.

Conclusion

There is no denying it: Palo Alto Networks is a standout name in cybersecurity. Its AI solutions should play a crucial role in tackling AI-powered cyberthreats.

However, despite the company’s confidence in platformisation, investors are going to have to wait to see whether the ambitious growth strategy will pay off.

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